Student Loan Refinancing

Learn about refinancing student loans. We layout the reasons, benefits, and potential drawbacks that come with it.

Refinancing Student Loans

The burden of having student loans has become somewhat of a morbid joke in the younger generations of the United States. Many young Americans take out thousand of dollars to ensure they can pay for a good education. However, those loans don’t always come with the best terms and rates.

Fortunately, this is where student loan refinancing can help. Getting your student loans refinanced can lead to much better rates and terms and can save you money.

So what exactly is student loan refinancing?

delaware loansThe Rundown on Refinancing Your Student Loans

Refinancing is a process in which a borrower replaces a loan with a newer loan that has different terms. The old debt is abolished so to say, and the new loan takes its place. So, refinancing your student loans is the same process, but with your student loans.

Many banks specialize in student loan refinancing, with the market have many different options. The process for refinancing is simple put it this:

  1. You have an existing loan that does not have the best terms and rates
  2. Another lender, or even your existing lender, is offering a loan with better terms and rates
  3. You apply to refinance your current student loan
  4. If approved, your old student loan is payed off using the new loan
  5. You begin to pay off your new student loan with different terms than the previous one

Why Refinance in the First Place?

Refinancing comes with some nice benefits. The first and most prominent reason is to lower your interest rate. Most people take their student loans out when they do not have much credit history, so the rates aren’t the greatest.

However, after building your credit for a bit, your credit history shows you can handle credit better. Because of this, many lenders may be keen to offer a refinancing option with much better terms than that of your original student loan.

Another reason to refinance student loans is the ability to drop your payment. After leaving college, student loans almost immediately begin to require payments. Being a fresh graduate probably means your income is not too high, so payments begin to eat away at a limited income. By refinancing, a borrower can lower their monthly payment, allowing some more flexibility with their income.

The third key reason for refinancing student loans is to change the term length. When originally withdrawing a student loan, a borrower may be keen on getting a longer loan, as that means the payments will probably be lower. However, if the borrower’s income has increased, it may be to their benefit to shorten the loan term length to shorten the amount of time they spend paying it off.

$100 loanDrawbacks to Refinancing

Probably the largest drawback to refinancing is the fees associated with doing so. Most lenders charge fees for the refinancing process. These fees can add up and if you’re not careful, you may find yourself in the hole just to refinance your student loans, or worse, pay more money for refinancing than your original loan would’ve cost.

Higher interest rates is another prime drawback to refinancing. When examining a refinancing option, you may find that the payments are lower than the original. However, this loan may come with a higher interest rate, and in the end, you could end up paying more than your original student loan, making the refinancing a wash.

Conclusion

Refinancing your student loans can be to one’s advantage. Many refinancing options can give a borrower better terms and save them money in the long run. However, you must always be sure to review and compare when looking to refinance, as not all options can be beneficial in the long run.

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